Congress's Financial Mess
Opinion Editorial by Walter E. Williams -
Jan 26, 2009
33 ratings from readers
Are
we ailing from too much deregulation? Is the financial meltdown a
result of free markets? A quick look at some of these facts should
help answer these questions — and more.
News
media people, often plagued with little understanding, fail miserably
in their duty to inform the public.
This
is particularly evident in their reporting on the current financial
meltdown, suggesting it was caused by deregulation and free markets.
Professor
David Henderson, research fellow at Stanford’s Hoover Institution,
writes about regulation in “Are We Ailing From Too Much
Deregulation?” in Cato Policy Report (November/December 2008).
The
Federal Register, which lists new regulations, annually averaged
72,844 pages between 1977 and 1980. During the Reagan years, the
average fell to 54,335. During the Bush I years, they rose to 59,527,
to 71,590 during the Clinton years and rose to a record of 75,526
during the Bush II years.
Employees
in government regulatory agencies grew from 146,139 in 1980 to
238,351 in 2007, a 63 percent increase. In the banking and finance
industries, regulatory spending between 1980 and 2007 almost tripled,
rising from $725 million to $2.07 billion.
So
here’s my question: What are we to make of congressmen, talking
heads and news media people who tell us the financial meltdown is a
result of deregulation and free markets? Are they ignorant, stupid or
venal?
A
New York Times article, “Fannie Mae Eases Credit To Aid Mortgage
Lending” (9/30/99), reported, “Fannie Mae, the nation’s biggest
underwriter of home mortgages, has been under increasing pressure
from the Clinton Administration to expand mortgage loans among low
and moderate income people …”
The
pressure was the 1977 Community Reinvestment Act that was beefed up
during the Clinton Administration. It required banks to make
high-risk loans they would not have otherwise made. Failure to comply
meant fines and difficulty in getting approval for mergers and branch
expansion.
When
questions began to arise about government policy that intimidated
lenders into making high-risk loans, we received congressional
assurances. At hearings investigating the solvency of Fannie Mae and
Freddie Mac, Rep. Barney Frank said, “The more people exaggerate
these problems, the more pressure there is on these companies, the
less we will see in terms of affordable housing.”
In
a speech to the Mortgage Bankers Association, Frank advised, “People
tend to pay their mortgages. I don’t think we are in any remote
danger here. This focus on receivership, I think, is intended to
create fears that aren’t there.”
Protesting
against greater controls against lax mortgage lending, Sen. Harry
Reid said, “While I favor improving oversight by our federal
housing regulators to ensure safety and soundness, we cannot pass
legislation that could limit Americans from owning homes and
potentially harm our economy in the process.”
One-third
of the $15 trillion of mortgages in existence in 2008 are owned or
securitized by Fannie Mae, Freddie Mac, Ginnie Mae, the Federal
Housing and the Veterans Administration. Wall Street buyers of
repackaged loans didn’t mind buying risky paper because they
assumed that they would be guaranteed by the federal government: read
bailout from the taxpayers.
Today’s
housing mess can be laid directly at the feet of Congress and the
White House.
Congress
and the White House aren’t finished with the taxpayers yet. Once a
bailout parade gets started, it has a momentum of its own. President
Bush, citing danger to the economy, signed a $17 billion bailout for
the auto industry.
According
to the Wall Street Journal article “Shovel-Ready on Campus”
(December 17, 2008), presidents of 36 state government universities
have called for bailouts; they call it a “federal infusion of
capital.”
Soon,
if not already, state governors and city mayors will descend on
Washington seeking bailouts. California is $15 billion in the hole,
Florida $5 billion and things are so bad in Michigan that the
governor has shut down one prison to save money.
What
kind of assumptions do politicians and news media make about the
intelligence of Americans to expect us to buy the idea that our
current mess results from deregulation and free markets? I do not
find that assumption flattering.
Walter E. Williams
is a professor of economics at George Mason University in Fairfax,
Virginia. He has authored more than 150 publications, including many in
scholarly journals, and has frequently given expert testimony before
Congressional committees on public policy issues ranging from labor
policy to taxation and spending.
